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On
the surface, the law appears to be having an impact. Since 2020, when
it was first floated, chipmakers have announced more than $200bn-worth
of investments in America. If all goes to plan, by 2025 American chip
factories (fabs, in the lingo) will be churning out 18% of the world’s
leading-edge chips (see chart 1). TSMC, a Taiwanese
manufacturing behemoth, is splurging $40bn on two fabs in Arizona.
Samsung of South Korea is investing $17bn in Texas. Intel, America’s
chipmaking champion, will spend $40bn on four fabs in Arizona and Ohio.
As the CHIPS Act celebrates its first birthday, and as
the administration prepares to start doling out the money, both
Democrats and Republicans, who agree on little else these days, regard
it as a bipartisan triumph.
Any
triumphalism may, however, be premature. Leading-edge fabs being built
in America are slower to erect, costlier to run and smaller than those
in Asia. Complicating matters further, the chipmakers’ American
investment binge comes at a time when demand for their wares appears to
be cooling, at least in the short term. That could have consequences for
the industry’s long-term profitability.
The
Centre for Security and Emerging Technology, a think-tank, estimates
that in China and Taiwan, companies put up a new plant in about 650
days. In America, manufacturers must navigate a thicket of federal,
state and local-government regulations, stretching average construction
time to 900 days. Construction, which makes up around half the capital
spending on a new fab, can cost 40% more in America than it does in
Asia. Some of that extra cost can be defrayed by the CHIPS Act’s
handouts. But that still leaves annual operating expenses, which are
30% higher in America than in Asia, in part owing to higher wages for
American workers. If those workers can be found at all: in July TSMC delayed the launch of its first fab in Arizona by one year to 2025 because it could not find enough workers with semiconductor industry experience.
The
planned American projects’ smallish size further undermines the
economics. The more chips a fab makes, the lower the unit cost. In
Arizona, TSMC plans to make 50,000 wafers a month—equivalent to two “mega-fabs”, as the company calls them. Back home in Taiwan, TSMC operates four “giga-fabs”, each producing at least 100,000 wafers a month (in addition to numerous mega-fabs). Morris Chang, TSMC’s founder, has warned that chips made in America will be more expensive.
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C.C. Wei, the current chief executive of TSMC, has hinted that the company will absorb these higher costs. He can afford to do this because TSMC will
continue to make the lion’s share of its chips more cheaply in Taiwan,
not in America. The same is true of Samsung, which will spend nearly 90%
of its capital budget at home. Even Intel is investing more in foreign
fabs than in American ones (see chart 2). As a result, if all the
planned investments materialise, America will produce enough
cutting-edge chips to meet barely a third of domestic demand for these.
Apple will keep sourcing high-end processors for its iPhones from
Taiwan. So, in all likelihood, will America’s nascent AI-industrial complex.
The
law may have unintended consequences, too. Chip firms which accept
state aid are barred from expanding manufacturing capacity in China.
Besides crimping the desire of firms like TSmc and
Samsung, which have plenty of Chinese customers, to invest more in
American fabs, such rules are prompting Chinese chipmakers to invest in
producing less fancy semiconductors. The hope is that lots of
older-generation chips can do at least some of what fewer fancier ones
are capable of.
According to SEMI,
an industry research group, in 2019 China made about a fifth of
“trailing-edge” chips, which go into everything from washing machines to
cars and aircraft. By 2025 it will produce more than a third. In July NXP Semiconductor,
a Dutch maker of trailing-edge chips, warned that excessive supply from
Chinese firms is putting downward pressure on prices. In the long run,
this could hurt higher-cost Western producers—or even drive some of them
out of business. In July Gina Raimondo, America’s commerce secretary,
acknowledged that China’s focus on the trailing edge “is a problem that
we need to be thinking about”.
Hardest to predict is the CHIPS Act’s
effect on the semiconductor industry’s notorious boom-and-bust cycle.
Usually chipmakers would be boosting capacity at a time of rising
demand. Right now the opposite is true. Pandemic-era chip shortages have
been replaced by a glut, now that consumers’ insatiable appetite for
all things digital appears, after all, to be sated. TSMC’s
sales declined by 10% in the second quarter, year on year, and the
company now expects a similar drop for the whole of 2023. Intel’s
revenue was down by 15% in the three months to June, compared with a
year earlier. Samsung blamed a chips glut for its falling revenues and
profits. Intel’s share price is half what it was at its recent peak in
early 2021.
Chip executives
point out that prospects for their industry remain rosy. They are
probably right that demand is bound to revive at some point. Yet
“inventory adjustments” (reducing oversupply, in plain English) are
taking longer than expected. And when inventories finally adjust, the
business that emerges may be less lucrative. Since early 2021 Intel,
Samsung and TSMC have lost a third of their combined
market value, or nearly half a trillion dollars. A few more
anniversaries may be needed before the CHIPS Act’s impact on American economic security can be properly evaluated. Investors are already making up their minds. ■